CTNIT 12 ZERO BASE BUDGETING

Transcription

1 Zero Base Budgeting is a management process that provides for systematic consideration of all programmes and activities in conjunction with the formulation of budget requests. It is a system whereby each governmental programme, regardless of whether it is new or existing programme must be justified in its entirety each time a new budget is formulated. It implies that, in defence of its budget request no department shall make reference to the level of previous appropriation. The analytical definition of Peter Sarant holds that "Zero Base Budgeting is a technique which complements and links the existing planning, budgeting and review process. It identifies alternative and efficient methods of utilising limited resources in the effective attainment of selected - CTNIT 12 ZERO BASE BUDGETING Structure 12.0 Objectives 12.1 Introduction 12.2 Concept and Meaning of Zero Base Budgeting 12.3 Zero Base Budgeting and Traditional Budgeting: A Comparison 12.4 Genesis of Zero Base Budgeting 12.5 StepsIElements of Zero Base Budgeting,'12.6 Introduction of Zero Base Budgeting in India 12.7 Implementation of Zero Base Budgeting -Benefits and Problems 12.8 Let Us Sum Up 12.9 Key Words References Answers to Check Your Progress Exercises After studying this unit, you should be able to: explain the concept and meaning of zero base budgeting distinguish zero base budgeting from traditional budgeting trace the developments which necessitated the introduction of zero base budgeting describe the process involved in implementation of zero base budgeting; and discuss the problems and benefits in implementation of zero base budgeting system INTRODUCTION India has been passing through a tight financial position. The budgetary deficit over the years has been increasing and as a result strict financial control became an urgency. The Government has taken a number of steps to reduce the budgetary deficit through control of expenditure. However, it is a well-known fact that financial management can be toned up through budgetary reforms on the lines of Zero Base Budgeting. Zero Base Budgeting (ZBB) is a control technique which requires that an organisation while preparing its budget should not take earlier year's expenditure for granted but should start afresh. This concept implies that a complete re-examination of the ongoing programmes and activities should be carried out to assess their continued utility. In this unit an attempt has been made to explain the concept of Zero Base Budgeting, its objectives, historical background and the process followed for its implementation. It also discusses the benefits and problems arising from the implementation of zero base budgeting. BUDGETING

2 Financial Administration benefits. It is a flexible management approach which provides a credible rationale for re-allocating resources by focusing on the systematic review and justification of the funding and performance levels of current programmes or activities." The objectives of Zero Base Budgeting according to the Department of Expenditure, Ministry of Finance, Government of India are: "Zero base budgeting requires identification and sharpening of objectives, examination of various alternative ways of achieving these objectkes, selecting the best alternatives through cost-benefit and cost-effectiveness analysis, prioritisation of objectives and programmes, switching of resources from programmes with lower priority to those with higher priority and identification and elimination of programmes which have outlived their utility." Zero Base Budgeting, thus, is an operating, planning and budgeting process which requires each manager to justify entire budget requests in detail from scratch, and shifts the burden of proof to each manager to justify why any money should be spent at all, as well as how the job can be done better. This approach requires that (i) all activities be identified in decision packages (or programmes) that relate inputs (costs) with outputs (benefits), (ii) each one be evaluated by systematic analysis, and (iii) all programmes be ranked in order of performance. Zero Base Budgeting aims at achieving a state of affairs whereby the whole of the budget needs to be justified in order to (a) combat waste and complacency (b) ensure that the relative tasks and activities remain under constant watch and review alternative levels of action in each sector periodically. The concept of zero base budgeting is as old as the concept of budgeting. Since the first budget of any organisation is always prepared from zero, all the organisations experience this approach at least once. However, in zero base budgeting the idea is proposed to experience it year after year i.e. every time the budget for the next period is prepared. This does not mean that efforts made earlier are not taken into consideration at all. What it exactly means is that one must re-evaluate all activities to find out the level to which such activity should be funded; i.e. whether it should be eliminated or shall be funded at reduced level or increased level or similar level? It shall be determined by the priorities established by top management and by the availability of funds ZERO BASE BUDGETING AND TRADITIONAL BUDGETING: A COMPARISON Zero Base Budgetineis more or less a self-defining term. As we have discussed earlier. in zero base budgeting all expenditures are thoroughly analysed from zero base, such that the current expenditure levels are justified. In contrast, traditional budgeting usually begins with estimation of current costs. These estimates serve as the starting point to which management will add data corresponding to price changes, estimated inflationary uplifts and planned additions, deletions or alternatives. The assumption is customarily made that current expenditure is justified, such that only the large budgeted increments from current expenditure levels need to be investigated. Failure to investigate current expenditure regarding its necessity and effectiveness will lead to funding of activities for which no increase, or perhaps a decrease in spending is warranted. Traditional budgeting has not proved to be a suitable tool for shifting resources from low to high priority areas. It does not involve the same rigorous approach as zero base budgeting and does not answer the question as to whether we are getting value for the money being spent. Zero Base Budgeting is a decision-oriented approach and focuses on old and new activities and connects short and long range goals by monitoring the achievements of objectives. On the other hand, traditional budgeting is accounting-oriented and focuses on increments and monitors expenditures. The logic behind traditional budgeting techniques stresses on three points:

3 - Last year's spending level is extrapolated into next year, Zero Base Budgeting - Some growth factor is added on account of inflation, increase in prices of raw material and wages etc. - Spending level is further incremented for new projects and programmes. ZBB attempts to shift the traditional management approach towards a new m ~de of thinking and operation whereby the managers not only justify the new proposals and the funds required, but also have to justify the ongoing activities and the funds required for them. In other words, in the conventional budgethg no review of ongoing activities is undertaken. It can be shown through the following diagram: Traditional Budgeting New Programmes b Zero Base Budgeting Review & Justify On-going Activities _- Thus ZBB helps managements to evaluate the claims on scarce resources in terms of organisation's objectives and to make trade-offs among current operations, development needs and profits, and allocate the financial and other scarce resources for the achievement of the objectives or goals of the organisation. Check Your Progress 1 Note: i) Use the space given below for your answers. ii) Check your answers with those given at the end of the unit. 1) Discuss the concept of ZBB highlighting its aims and objectives....! 2) Distinguish between ZBB and traditional budgeting GENESIS OF ZERO BASE BUDGETING The origin of the concept of ZBB can be traced back to the year 1924 when Hilton Young, the noted English budget authority stressed the need for annual re-justification of budget programmes. Later in 1960 the US Defence department introduced the Programme, Planning and Budgeting System (PPBS). It was based on cost-benefit analysis and was very much similar to ZBB. But the final attempt to introduce ZBB was made by the US Department of Agriculture in 1962, when the budget director suggested that each programme be justified from zero and in 1964, this department prepared the budget. This experiment however proved unsuccessful due to various reasons. The various agencies proceeded on the assumption that their programmes were necessary and formulated them accordingly. The new technique was taken as an additional exercise enhancing the volume of paper work, time and energy and as such it could not be

4 Financial Administration managed properly by the concerned agencies However, it was Peter Pyhrr who designed its logical framework and implemented it successfully in the private industry in 1969 while working as a staff control manager in Texas Instruments USA. In 1968, Pyhrr reviewed the speech given by Authur F. Burns on the control of government expenditure which advocated that government agencies should start from ground zero, as it were, with each year's budget and present their appropriation in such a manner that all funds can be allocated on the basis of costbenefit analysis, resulting in substantial cost savings. Thus Pyhrr formulated this concept in order to reduce staff costs. He developed this system as a tool for planning budgeting and control. He first applied it to research and development divisions of the company. Finding it successful, he extended it to other divisions of Texas Instruments. Based on this experience he published an article which caught the attention of the then Governor of Georgia -Jimmy Carter who invited Pyhrr to apply the approach to the State of Georgia. ZBB was introduced for the first time in a government system and was adopted for the formulation of the budget for the fiscal year Jimmy Carter was so much. influenced with its success that when he was elected President of the USA, he introduced the concept of ZBB in Federal Budgeting Control Systems and also made it mandatory through the legislation for the year President Carter claimed that an effective ZBB system will benefit the Federal Government in several ways e.g. it will: - Focus the budget process in a comprehensive analysis of objectives and needs. - Combine planning and budgeting into a single process. - Cause managers to evaluate in detail the cost-effectiveness of their operations. - Expand management participation in planning and budgeting at all levels of the federal government. Following the memo, the office of Management and Budget (OMB) issued Bulletin No. 779 on April 18,1977 providing budget guidelines and instructions to the agencies on the use of ZBB for the preparation and justification of 1979 budget requests. It stated ZBB as a management process that provides for systematic consideration of all programmes and activities in conjunction with the formulation of budget requests and programme planning. The principal objectives of ZBB were to: - Involve managers at all levels in the budget process. - Justify the resource requirements for existing activities as well as the new activities. - Focus the justification of the evaluation of discrete programmes or activities of each decision unit. - Establish, for all managerial levels in an agency, objectives against which accomplishments can be identified and measured. - Assess alternative methods of accomplishing the objectives. - Analyse the probable effects of different budget amounts or performance levels on the achievement of objectives; and - To provide a credible rationale for re-allocating resources, especially from old activities to new activities. Though the conversion from conventional budgeting to ZBB did pose some problems, yet the implementation process proceeded smoothly. Thus in the USA ZBB achieved an unprecedented goal without going for a pilot experiment and the Federal government agencies became the experimental laboratory of ZBB. Since 1973, in the USA ZBB has become apopular management tool in both public and private organisations. A dozen states, 36 municipalities and 500 corporations have used it with a great degree of success as compared to government agencies STEPSIELEMENTS OF ZERO BASE BUDGETING ZBB is a four step budgeting process which can be applied in a relatively simple way in any organisation. However, there are a number of conditions which must be fulfilled fnr 9 cnnrr~ccfi~l irnnlement9tinn nf 7RR

5 - There must be a genuine need within the organisation. - Thc: management environment of an organisation should be objectively assessed. - A competent management accountant should,occupy a senior budgeting position within the organisation. - A ZBB programme must have the unqualified support and involvement of top management. - ZBB must be tailored to the technical requirements of the organisation intending to implement it. - A budget should be prepared for the organisation. - The implementation of ZBB programme will be aided by a commitment to postimplementation review and maintenance of the programmes. Zero Bare Budgeting. The basic four steps are: 1) Review of organisational structure, and identification of decision units and their objectives. 2) Analysing the decision units, working and evolving documented decision packages. 3) Reviewing and ranking the decision packages on the basis of chosen criteria. 4) Allocation of organisation resources to rank decision packages and preparing detailed operating budgets. Step 1. Decision Units The first starting step in ZBB is the analytical review of the organisational structure and activities conducted. In every organisation there are meaningful interrelated hierarchical parts which are separated in order to verify the reporting relationships and functional responsibilities. This stage is intended to isolate key decision points in the organisation's hierarchy commencing with the lowest level and progressing to the top. The identification of the organisational entities (decision units) which will prepare budget requests for the organisation are accomplished through selection by higher level management. Selections are based on relationship to organisation, special analysis and re-organisation. Other factors are that units are not too low nor too high in the organisation to prevent meaningful review or analysis and the managers of these units make significant decisions on the amount of spending and the scope, direction, or quality of work to be performed. A decision unit is a distinct segment of an organisation for which budget is prepared. Decision units are identified by segmenting the organisation into discrete functions, operations or activities for review and analysis. These are the lowest units in the organisational hierarchy which are headed by responsible managers having authority to make decisions on the activities under their control. These should be capable of carrying out different programmes or activities to achieve an objective. / The identifica.ion helps in deciding the levels in the organisation at which budgets should be formulated or ZBB ought to start first. Instead of considering the whole department as decision units, individual sections or performing units of each of these departments should be treated as separate decision unit. The location of decision unit often is a difficult exercise. It is imperative that in the identification there should be a complete knowledge about the organisational structure, its management and objectives. Once the decision units have been identified, each of these must be analysed keeping in view (a) the functions of the department (b) whether any of the tasks are being performed due to some abnormal situations such as expansion, consolidation, (c) whether any of the tasks being performed be reduced or eliminated completely (d) the minimum staffing required to accomplish the normal functions of the decision units. Step 2. Formulation and Development of Decision Package Top level management completes two functions in the zero base budgeting process before decision packages (budget requests) are prepared. It decides as to which level of management develops the initial budget requests and budget guidance it needs to prepare the requests (decision packages). These two functions illustrate why ZBB is

6 first a "top-down" process before becoming a "bottom up" management process. A decision package includes comprehensive justification for budget estimates of an activity. Such a justification is built up by answering a number of questions. The first question to be answered is in regard to the need for the proposed expenditure as to what specific purpose it is serving. This would necessitate sharpening the objectives of the expenditure so that it could be evaluated by using the relevant evaluative techniques or measures of performance. In case the proposed expenditure is justified in the context of its objectives, a further question may be asked to know if there is a better alternative of incurring expenditure to achieve the specified objectives. To quote from Government of India's letter issued in 1986 on the subject of "Introduction of zero base budgeting in the Government of India" a decision package is a budget request which should contain the following: - A description of the functions or activities of the decision unit. - The goals and objectives of the various functions/activities of the unit. - Benefits to be derived from financing the activityjproject. - Relevance of the activityjproject to the overall objectives of the organisation/ department in the present context. - The consequences of its non-funding. - The projectedjestimated cost. - The yearly phasing of the proposed expenditure. - Alternative ways of performing the same activity or same objective As Pyhrr defines it "the decision package is a document that identifies and describes a specific activity in such a manner that management can (a) evaluate it and rank it against other activities competing for the same or similar limited resources and (b) decide whether to approve or disapprove it. One of the significant aspects of the decision packages is that it is used by a manager to define his or her objectives and responsibilities and how best to meet them at various levels of effectiveness. The manager also defines the methods for achieving the objectives. The manager can recommend elimination of some of the activities. ZBB Decision Package Format Decision Company Code Bank Package Objective of Activity Level of: Dept. Discussion/Section Desired Resources Current Budget Year Results Required Year Description of Activity Personnel No. Wages Salaries Total staff variable Total How and when accomplished Alternatives to achieve result Advantages of retaining activity Consequences if activity is eliminated Prepared by Date Approved by Date % age of current

7 Each subordinate review level prepares a ranking sheet to submit to thenext higher review level. This sheet serves primarily as a summary sheet to identify the order of Step 3. Ranking of decision packages After the construction of decision packages the next important step is to rank the decision packages. Ranking is the process of arranging the various service levels (decision packages) and benefits to be gained from the additional funds to be allocated. These are ranked in order of priority or decreasing benefits to the organisation. The process allows management to allocate scarce resources by concentrating on the following three key questions: 1) Where to spend the money first? 2) How much should be spent in pursuing these goals and objettives? 3) What are the consequences of non-implementing those decision packages which are not going to be approved? The ranking is done on an ordinal scale (i.e. lst, 2nd and 3rd etc.) in order of priority. Because of the huge numbers involved the ranking process takes place at a number of levels depending on the size, geographical dispersion, levelsof management, volume of decision packages, unit managers, budget staff or by ranking committee. Zero B ~se Budgeting Cut off level of funding Ranking of decision packages in large organisations is more problematic as compared to smaller organisations. In large organisations identifying each discrete activity with several levels of effort could create a number of problems. If management has to review in detail and rank every decision package with conflicting needs, it may take valuable time and effort of the top management. This problem could be reduced to some extent by: i) Concentrating management review on lower priority discretionary packages around which the funding levels or cut off levels will be determined. ii) Limiting the number of consolidation levels through which the packages will be processed. All packages presented for funding generally would fall into three categories i) Those with higher priority and high probability of funding. ii) Those with marginal priority and which may be funded or not funded dependingon the resources available; and iii) Those with low priority and low probability of funding. The cut off level of funding is usually established arbitrarily as a percentage of current year budget or actual expenditure level or in absolute rupee value. It is important to note that cut off level has nothing to do with the ultimate allocation of resources. It is only a means to help the ranking managers to cut down the time and effort needed to review and rank packages. Top level review A Ranking Process Senior level consolidation and ranking B~ B2 B3 B4 Middle level consolidation C I c2 c3 c4 c5 Preliminary ranking by "1 "2 "3 "4 managers who developed it "5

8 Financial Administration priority placed on each decision package. Each time a ranking sheet is filled out by the ranking manager who sends it to the next ranking manager. It serves the following purposes: 1) It identifies cumulative funding level which helps top management to know whether the total budget request has exceeded the total available resources or is still below it. 2) It allows top management to decide which package it wants to review in detail. 3) It provides a work sheet to top management to make funding decisions among several rankings readily, adjust the funding levels etc. The ZBB can be adopted by any organisation willing to aggressively eliminate its budgetary deficit. But only managers intimately acquainted with the organisation culture can make it work effectively. Although the process is ideally suited for costeffective planned growth, most managers probably will be initially interested in its enduring cost-reduction aspects and the capability it provides for responding flexibility, to sudden shifts in an operating environment. \ 12.6 INTRODUCTION OF ZERO BASE BUDGETING IN INDIA The concept of ZBB has been in use in Indian private industry since long. For example Britannia Industries Ltd. and Union Carbide have been using it since without calling it Zero base budgeting. However in government context, it is of recent origin. The first application of the system was in the Department of Science and Technology in In view of the severe resource crunch for the seventh plan, several alternative steps were recommended to the government by the Eighth Finance Commission and the Planning Commission to prune the wasteful public expenditure and inefficiencies in implementation of government programmes. The Finance Ministry decided to introduce the system of ZBB in all departments of the Union Government in , as it was important to control the government expenditure of the seventh plan which was showing a negative contribution. Unless the situation was remedied, the only alternative was to cut the plan outlay or to resort to more deficit financing than was envisaged in the plan document. Neither alternative was desirable and therefore the government, had launched a massive economy drive. On 10th July 1986, the Ministry of Finance issued a circular-cum-budget guidelines to all ministry departments, and State Governments and Public Sector Undertakings, impressing upon them the need to apply ZBB to all schemes and programmes with over Rs. One Crore outlay from the fiscal year For this purpose, a Central monitoring cell was formed. The Finance Ministry had identified around 150 redundant and low priority schemes with the estimated outlays over Rs Crore which the Ministry wanted to eliminate. Among the State governments, Maharashtra has.been implementing ZBB in 42 departments. The budget for reflected a saving of Rs. 50 crore. Several, redundant and duplicative and low priority schemes have either been eliminated or merged. Similarly Karnataka Government experimented with ZBB in Public Health and Agriculture Sections and also had plans to apply it to all 45 departments. Among the public sector undertakings, Madras Refineries Ltd., HMT, BHEL, BEL, Indian Telephone Industries, Indian Oil, Neyveli Lignite Corp., a few steel plants and nationalised banks have planned to implement ZBB IMPLEMENTATION OF ZERO BASE BUDGETING - BENEFITS AND PROBLEMS The implementation of ZBB has certain benefits and some problems too. Let us now discuss these:

9 Benefits of Zero Base Budgeting The major benefits of the use of zero base budgeting can be the following: i) Zero base budgeting examines all existing and new programmes and activities. It also makes the managers analyse their functions, establish priorities and rank them. This exercise helps in identifying inefficient or obsolete functions within the area of responsibility. In this way resources are allocated from low priority programmes to high priority programmes. ii) This system facilitates identification of duplication of efforts among organisational units. Such inefficient activities are eliminated and some other activities are merged. iii) All expenditures, under this system are critically reviewed and justified and all operationslactivities are evaluated in greater detail in terms of their costeffectiveness and cost-benefits. This requires managers to find alternative ways of performing their activities which may result in more efficient procedures. iv) ZBB promotes the tendency to initiate studies and improvements during the period of operation as the persons at the helm of affairs know that the process would be exercised next year and their knowledge and training would enhance efficiency and cost-effectiveness. v) ZBB provides for quick budget adjustments during the year. If revenue falls short in this process, it offers the capability to quickly and rationally modify goals and expectations to correspond to a realistic and affordable plan of operations. vi) ZBB ensures greater participation of personnel in formulation and ranking processes. This helps in promoting level of job satisfaction and thus resulting in better control and operational efficiency in the organisation. vii) Zero base budgeting is a flexible tool that can be applied on a selective basis. It does not have to be applied throughout the entire organisation or even in all the service departments. Keeping in view the limitations of time, money and persons available to instal, operate and monitor it the management thus can select priority areas to which zero base budgeting may be applied. 7tq-o Hase Hudgeting The benefits of ZBB thus can be summed up as follows: - It eliminates redundant activities and those which are being duplicated. - It identifies low and high priority activities for resource deployment. - It justifies budget requests on cost-benefit and cost-effectiveness basis. - It allocates scarce resources rationally. - It sharpens and quantifies objectives and formulates alternative methods of operations. - It promotes involvement of line managers in budget formulation. Problems in Implementatioo i) Management factors: Whenever any cost control technique like zero base budgeting is adopted there is resistance from certain individuals and groups having interest in the organisation. Since goals, objectives and targets are achieved through the actions of responsible people whose behaviour makes the system work or fail, it is essential for the organisation to examine the effects of adoption of new techniques on the people and the effects of people on techniques. This is very important for the adoption of ZBB as it challenges the past practices, methods, performance, attitudes, habits etc., of the people working in the organisation. As such it becomes very important for the management to effectively manage its internal organisation before taking any step towards implementation of the zero base budgeting. Thus effective management of the organisation is the primary requisite in implementation of the programme. ii) ZBB is time consuming and is a more complicated process than the conventional budgeting. It requires more staff, a great deal of time and effort as compared to conventional budgeting system. For managers at all levels to understand the system thoroughly there is need for proper communication system. iii) ZBB involves voluminous paper work. Each ddsion unit is supposed to prepare decision packages and rjve prover iustification. In government de~artments.

10 Finnncinl Adminislrntion where there are thousands of programmes and activities, the number of decision packages may run into several thousands. This is bound to create handling problems and confusion. iv) There is no standard formula for identifying the minimum level of funding. Generally minimum level of funding is identified on arbitrary basis which comes from top management as budget guidelines. But the viability of this procedure is questionable. v) The ranking of decision packages, particularly when the number of such packages is large, creates a big problem. The ranking may become an unwieldy process. vi) Zero base budgeting decision and the p v of fixing priorities become a political nightmare. Conflict may arise on ranking as managers have a tendency to assign a higher priority, to their own projects. Problems of ZBB can be summed up as: i) It challenges the past practices, performance, attitudes, of people. ii) It requires more time and effort. iii) Detailed costs and necessary information for decision packages often are not made available. iv) It increases paper work to unmanageable proportions. v) Ranking a large number of decision packages becomes an unwieldy process. vi) Identifying various levels of funding, particularly the minimum level is a difficult task. Check Yonr l'mgms 2 Note: i) Use the space given below for your answers. ii) Check your answers with those given at the end of the unit. 1) Trace the evolution of zero base budgeting system in India.... 2) Describe the stages in the implementation of zero base budgeting.... 3) What are the benefits of this technique? LET US SUM UP The ZBB is a technique which helps in achieving the goals of an organisation through better resource allocation. It is a system of helping managers at all levels to evaluate in

11 detail the Cost-effectiveness of their operations and specific activities. It permits the executives to better establish their priorities and allocate scarce resources. Under this system, new expenditure proposals are to compete on the same footing with the ongoing expenditure based on their respective merits so as to claim a share of the available resources. In India ZBB was formally introduced in 1986 but so far it has failed to take off. It has been implemented in the true sense only in the department of space. For the rest of the ministries the success is negligible. However, the economic crisis through which India is passing, makes it imperative that ZBB is implemented in true spirit. In fact the system has failed to take off due to administrative problems. Zero Base Budgeting 12.9 KEY WORDS.. Deer~lon Unit: It is a distinct segment of an organisation for which budget is prepared. It is identified on the basis of functions, operations or activities of the organisation. Decisionm: A document that identifies and describes facts about an activity from every possible angle. PInnning Rogpmdqj Bodgding System (PPBS): It is a technique for optimising allocation of funds in the budget through exercise of proper choice among programmes which compete for limited resources. This technique requires that the identification of goals or objectives to be achieved by the organisation be clear and specific. The next step is to search for alternative programmes for achieving these objectives most. effectively and at least cost. The costs of each programme should be related to the corresponding output from them. Ranking: Procxs of arraaging activities in the order of their priority REFERENCES Austin Allan, Cheek Logan, Zero Base Budgeting: A Deckion Package Manual, Amaclom: New York. Handa, K.L Expenditwe Control and Zero Base Budgeting, Indian Institute of Finance: New Delhi. Joshi, P.L. & V.P. Raja, Techniques of Zero Base Budgeting: Text and Cases, Himalaya Publishing House: Bombay. Pyhrr A. Peter;1973. Base Budgeting, John Wiley and Sons: New York. Sarant Peter C., L o &irc Budgeting in Public Sector, Westley Publishing Company: Addison. Stonica Paul J., 1977.' Zero Base Planning and Budgeting, Don Jones: Home Wood ANSWERS TO CHECK YOUR PROGRESS EXERCISES 1) Youranswer should include the following points: Zero base budgeting is a system whereby each governmental programme, regardless of whether it is a new or existing programme must be justified in entirety each time a new budget is formulated. Whole of the budget must be annually justified from scratch in order to combat waste and complacency. It requires identification, examination, selection of the best alternatives through cost-benefit and cost-effective analysis. 2) Your answer should include the following points: in zero base budgeting all expenditures are thoroughly analysed from base zero while traditional budgeting usually begins with the estimation of current cost.

12 Financial- Administration Zero base budgeting facilitates shifting of resources from low to high priority areas while it is not possible with traditional budgeting. While zero base budgeting is decision-oriented approach which focuses on old and new activities, traditional budgeting is accounting-oriented which monitors expenditure. Check Your Progress 2 1) Your answer should include the following points: Introduction of ZBB in all departments of the Union Government in with a view to controlling government expenditure. Issue of budge guidelines by the Ministry of Finance to all ministry departments, state governments, public sector undertakings to apply ZBB to all schemes and programmes with over Rs. one crore outlay for the fiscal year Introduction of ZBB in some states like Maharashtra and Karnataka. 2) Your answer should include the following points: Identification of decision units and their objectivies. Formulation and development of decision packages. Ranking of decision packages. Allocating resources to decision packages. 3) Your answer should include the following points: Identifies inefficient or obsolete duplication of activities. Facilitates critical review of all programmes/activities in terms of their costeffectiveness and cost-benefits. Ensures greater participation of personnel in formulation and ranking process. Provides for quick budget adjustments during the year. Allocates scarce resources rationally. \